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The Concept of Economic Nexus November 2018
The question of nexus has been one that states have struggled with for many years. Nexus is what determines where a sale is taxable. For many, many years, Nexus required a physical presence to turn sales taxable in a given state. Physical presence was defined as maintaining an office, a warehouse/inventory storage, or retaining employees in a given state. Having Nexus in a state usually meant a company was required to register to conduct business in that state and file/pay income and sales taxes in that state.
With the advent and explosion of internet/on-line commerce, it became easier to conduct business in many states, but to only have Nexus in one. This was highlighted in the early days of Amazon and other online retailers. They were able to ship products all over the country, but avoided sales taxes by only having Nexus in one or two locations. Today, with warehouses all over the country, large retailers such as Amazon or Wal-Mart are finding it difficult to avoid the Nexus trap. But for others, they were still able to avoid Nexus and could avoid taxes in all states. This was not an acceptable arrangement for the states. One state in particular, South Dakota, took one of these retailers to court, and earlier this year, this court case produced the landmark Supreme Court decision known as South Dakota vs. Wayfair.
This court case gave us the concept of Economic Nexus. Economic Nexus is a concept that a state can define thresholds for sales volume or transaction volume. If an out of state retailer crosses either of these thresholds, it is now responsible to remit sales taxes or file income taxes in the state in question. So, if a company has only one location here in Ohio, but it does significant on-line business in Arizona, for example, the company may be required to register and remit sales and/or income taxes to Arizona, based on this concept of Economic Nexus.
Now, this is not a concept that every company will need to worry about. Those companies who have one location and do not have a significant on-line presence should not notice any differences. But, there are some companies that will need to evaluate its sales to all states, in relation to dollar amount and number of transactions, to see if they are affected by Economic Nexus. What compounds this analysis is every state can set its own thresholds and rules, and these rules are still coming out. The case was decided in March for just one state, and as recent as October states were adding themselves to the growing list of states that have Economic Nexus rules.
The take away from this case is that what was done in the past may no longer apply. You will need to consider sales in other states for potential filing requirements. As your advisor, we will work with you to analyze your sales information and make the necessary determinations for filing requirements going forward. As we approach year end, this will be a topic of our annual review meetings with you. Should you have questions ahead of your meeting, please do not hesitate to contact your advisor at 440-899-7116.
*This information is intended to provide generalized information that is appropriate in certain situations. It is not intended or written to be used, and it cannot be used by the recipient, for the purpose of avoiding federal tax penalties that may be imposed on any taxpayer. The contents of this post should not be acted upon without specific professional guidance.
Steve | 11/13/2018
Furrer & Associates, Inc. | 28045 Clemens Road Suite B , Westlake, OH 44145 | Phone: (440) 899-7116 | Fax: (440) 899-7182 | email@example.com